July 22, 2002
By Edwin J. Feulner, Ph.D.
Say you own a grocery store. You notice that six-packs of a
particular soft drink are selling briskly at $2 each, which brings
you a modest profit. A friend says you should sell them at
$4-which, he suggests, would double your profit. Would you do
Probably not. You don't need an MBA from Wharton to realize that
dramatically hiking your price would cause many customers to shop
elsewhere. Sure, you'd be making more money per six-pack, but you
wouldn't sell nearly as many.
Just common sense, isn't it? So why does Congress act like the
store owner's friend every time it votes to raise spending,
increase taxes or assemble a budget?
Indeed, some lawmakers are fighting a proposal that would require
them to take real-world considerations into account. They prefer to
keep "scoring" each bill-estimating how it will affect the economy
and the amount of taxes they take in-with the "static" model used
by the store owner's friend. If, say, a 5 percent tax on something
brings in $50 million, they assume a 10 percent tax will fetch $100
Not surprisingly, this approach has caused lawmakers to come up
with some wildly inaccurate assumptions over the years. Consider
what happened with President Kennedy's tax cut. Many lawmakers were
sure that, with the top marginal tax rate being slashed from 91
percent to 70 percent, tax revenues would plunge. Instead, the cut
spurred economic growth. Between 1961 and 1968, tax revenues rose
The same thing happened when President Reagan cut taxes in the
early 1980s. Many lawmakers predicted financial ruin as the top
rate plummeted from 70 percent to 28 percent. Again, they were
wrong. Once the cuts were phased in, tax revenues soared. The
amount of money the federal government was taking in through
personal income taxes had increased 28 percent (adjusted for
inflation) by 1989.
Yet no matter how many times a "static" analysis is disproved,
Congress keeps doing business in the same wrong-headed way. And it
can have serious implications. Look at how Congress handled repeal
of the estate (or "death") tax last year. During the period the
legislation was being debated, static estimates of how much a
repeal would "cost" jumped from $186 billion to $306 billion
between 2002 through 2011. Alarmed, Congress elected to phase in
the repeal slowly, until the tax is gone in 2010 … and then
reinstate it in 2011 at its original levels.
If experience is any guide, though, death-tax repeal won't "cost"
nearly that much. But by the time most lawmakers realize that,
another opportunity to boost economic growth will have been
Can you imagine any private business acting this way? Of course
not. That's why it's time Congress switched to a method many
business owners use-"dynamic scoring"-which assumes that if you
change the way you do business, customers will react in relatively
predictable ways. Before they've hiked a price or changed a
product, most companies have a pretty good idea of how many
customers they'll gain or lose.
Would "dynamic scoring" always give lawmakers perfect estimates?
No, but it surely would get much closer to the true cost than
"static scoring" does. If doubts remain, put it to the test: Have
Congress produce "static" and "dynamic" scores of various pieces of
legislation for a few years and see which prove more
Meanwhile, certain lawmakers are assuring us that we can't make the
Bush tax cut permanent. (Like the death-tax repeal, it's gone in
2011.) Why? "Static" estimates show it will cost too much. Haven't
we been here before?
J. Feulner, Ph.D. is president of The Heritage Foundation,
a Washington-based public policy research institute.
Distributed nationally on the Knight-Ridder Tribune wire
Less "Static," Please
Edwin J. Feulner, Ph.D.
Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
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